The Unit Trust option

August 27, 2008

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By RITAH MUTUKU, NAIROBI, August 20 – The last three years have witnessed over five Initial Public Offerings (IPOs) a sign that the capital market has rapidly come of age. In each of these IPOs, thousands of retail investors flocked stockbrokers’ offices seeking to own the companies’ shares, others for the first time.

At the same time, this cluster of investors is increasingly looking up to financial advisers in a bid of understand the market better as well as get information on how and when to buy a certain stock.

And since financial investment advisers seem not to be meeting the demands of this legion of traders, most are now opting for less risky and professionally managed investment options.

For Kenya, this is a logical stage in capital market development, explains James Murigu Suntra Investment Bank’s Managing Director, whose firm launched the investment vehicle a few months ago.

He notes that some of the stock brokers – who double up as financial advisers- have come a long way. “What is happening is that there are too many potential or existing investors who are seeking financial advisory services. And since investors no longer want to make uninformed decisions, especially at the stock market, many are taking their money to unit trusts,” says Murigu.

Unit trusts are a fairly new breed of investment vehicles in Kenya. They are open-ended investments; therefore their value is always directly represented by the total number of units issued multiplied by the unit price less the charges on transaction, management and any other associated fees.

The market offers four types of unit trusts; the equity, balanced, money market and fixed income funds. The latter three are the most popular among investors.

Each fund has a specified investment objective to determine the management aims and limitations. The fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund’s net asset value.

The money is then handed over to professional fund managers- through trustees- who in turn choose a range of portfolios in which they invest the money. The trustees, usually a commercial bank, are the legal owners of the securities and responsible for ensuring that the managers keep to the terms laid down in the trust deed. Prices of unit trusts are quoted daily.

Each time money is invested, new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price. Typically, the money is invested in equity and money markets. In the money market funds are invested in high yield, short term instruments of credit. In equity market funds, money is invested in shares, mainly of publicly listed companies.

But what is drawing investors, especially young professionals, into this fast-growing investment option and what does it take to be an investor in them? “Since an increasingly larger number of investors are becoming more convinced that their money is being handled by professional fund managers, they are shifting their money to unit trusts. This is because they are more assured that a more knowledgeable person-the fund manager- is on top things as far as their investments are concerned,” explains Murigu.

Suntra- a sponsor in this arrangement- is offering these trusts at Sh100,000. Buyers can then top up with Sh10,000 depending on how much they want to put in.

“As the market for unit trusts shapes up and systems work, the pricing might go lower in the coming days,” he reckons.

Unit trusts buyers with Zimele Asset Management Company Limited can pay a minimum entrance fee of Sh5,000. This is probably the lowest entrance fee in the market, although Old Mutual Investment Group seems to be headed the same way; recently the firm launched an investment plan that allows one to access unit trusts for as low as Sh8,000. Initially the company had pegged their entrance level at Sh200, 000 and later reduced it to Sh150,000.

According to various fund managers, the nature of unit trusts as being open ended means that investors can get their money when they so wish. This is a major advantage for, say, those who are working on contracts since they would be able to access their cash in case their contracts are terminated or do not get jobs elsewhere.

Isaac Njuguna, the investment manager at Zimele explains that unit trusts give investors flexibility to plan on their finances from the investments they have already made. Apart from shares, it is unlikely to find such an investment option that enables you to move on smoothly without processes and transactions. However, investors are advised to go for long-term options to maximise their returns.

Apart from ICEA Asset Management Company, Zimele, Old Mutual and Suntra, other fund managers are British American Asset Managers Limited, Commercial Bank of Africa, African Alliance Kenya and Stanbic.

Unit trusts are an efficient and cost-effective way to build investments. It is no wonder that most players have started pitching camp in rural areas as they would also be a good option for those in the rural areas where financial advisory services are hard to come by.